What if the EU starts boycotting oil and gas from Russia?

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Peter Verbaken, Head of APG's Commodities Team, talks about the consequences of a boycott of Russian energy.

A gas and oil boycott is not part of the latest sanctions package against Russia, but it is a measure the EU is holding in reserve. According to a report by the Netherlands Bureau for Economic Policy Analysis, the Netherlands will be hit hard if Brussels imposes such a ban. Should we therefore be afraid of such a boycott? Or will the consequences not be as bad as expected, as professor of economics Sweder van Wijnbergen argues in de Volkskrant?

First of all, Verbaken says that the situation in Ukraine affects him. “It is terrible to see how the people of Ukraine are suffering from the violence of war and how the country seems to be slowly being devastated. I've been following it closely from the start, also partly because of the impact it has on my work, and I sincerely hope it ends soon."

Coal as an alternative
Because of Europe’s heavy dependence on Russian gas, a gas boycott will hit harder than an oil boycott, Verbaken argues. “In the Netherlands, we have been lucky with a mild winter. At the end of last year, even before the Russian invasion of Ukraine, there was already a huge increase in the price of gas because stocks were so low. The mild winter and an increase in Russian gas supplies enabled us to get through the winter. But now we need to replenish gas supplies in the summer. If a ban on Russian gas imports does not allow us to replenish stocks in time, an alternative plan will be needed. Van Wijnbergen mentions the use of coal as a solution. In theory, that is indeed possible, although it is, of course, contrary to current climate policy. But it cannot be ruled out that politicians might nevertheless decide to switch from gas to coal in this exceptional situation.”

The question is whether coal can make up for the loss of Russian gas. Verbaken does not think so. “In practice it will turn out that you also have to do something on the demand side. For example, there is already a government campaign called ‘Turn the Switch’, which aims to get households to turn the thermostat a degree lower. However, a third of the gas demand in the Netherlands comes from industry. In order to reduce this demand, it cannot be ruled out that large industrial gas consumers will be forced to use less gas. This is certainly conceivable if Dutch gas reserves are not to be topped up with Russian gas this summer. However, forcing industry to use less gas is a radical measure of the kind we haven't seen since the 1970s, with the oil crisis and car-free Sundays.”

Oil shortage
In the case of oil, it is a slightly different story. Should the EU no longer import oil from Russia, then China and India will buy up the Russian oil at steep discounts, Van Wijnbergen expects. As a result, both Asian powers will need to import less non-Russian oil from the world market and therefore there will be no oil shortage. In theory, Van Wijnbergen has a point, but in practice things may turn out more difficult, Verbaken believes. “It will certainly take Europe several months to switch from Russia to other oil suppliers. In addition, the West is putting pressure on China and India not to play Russia’s savior, especially after the latest news about the many civilian deaths in Ukraine. What also comes into play are the so-called letters of credit, the financing required to ship oil. Financial parties will be very cautious about issuing them due to the threat of sanctions and public opinion.” It therefore seems unlikely in the short term that an oil shortage can be avoided by China and India importing more Russian oil, leaving more non-Russian oil for the EU countries.    

Major interventions
Verbaken thinks that Van Wijnbergen’s view is a bit on the optimistic side when it comes to the consequences of the removal of Russian energy. “Among other things, he is missing the factors that make shifting oil flows complex, and that gas demand really needs to come down.” Most problematic remains the boycott of gas. “The elimination of Russian gas punches a hole in our supply. If it can't be replenished in the summer, the problem will become more and more critical,” Verbaken says. “It’s like driving towards a cliff. The gas supply can only be sufficiently replenished if sufficient coal-fired power stations can be started up, the demand for gas can be reduced, and the supply of LNG (liquefied natural gas) can be tapped here and there. At the moment all that is being asked of the population is to use gas more sparingly, but what if that proves insufficient? How far do you have to go to force industries to use less gas? And which industries do you start with? The crux of this situation is that the government cannot explain to the population that they will not be able to heat their homes next winter. Major interventions are needed to prevent that from happening. The concerns about the impact of a boycott of Russian gas and oil are therefore certainly justified as far as I am concerned. However, given the current situation, with all the suffering that Moscow causes, it would be a perfectly justifiable sanction against Russia. If it is actually implemented, the government, industry and the Dutch population will have to work hard together to minimize its impact on us.”